Monday, March 9, 2009

A Horrible Idea From The Obama Administration

On Friday, February 27th, a film crew from CNN came to my office to tape my answer to the question, "What do you think of the Obama administration proposal to decrease the charitable tax deduction for those who make $250,000 or more?" As usual, my 15 minute answer on camera was edited down to about 20 seconds on CNN. It aired on The Situation Room show with Wolf Blitzer, the Lou Dobbs show, and AC360 with Anderson Cooper. The piece on AC360 can be viewed if you click here. The bottom line - I said the proposal is a horrible idea.

CNN chose to close the report (on some shows) with the remark (paraphrasing), "A study by the Bank of America indicates that only 7% of the affluent based their giving decisions on the tax advantages." That is not what I read. The Chronicle of Philanthropy News Update of March 3, 2009 summarizes from the Bank of America survey that, "... 47% of people in the survey reported that they would give less" based on a removal of the deduction (the survey posed an all or nothing question, not a % reduction). Furthermore, the head of the Center on Philanthropy which conducted the study with the Bank of America, concluded that:

"Tax incentives do stimulate more giving, and challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional [emphasis added] incentives, rather than reduce the value of the tax deduction for high income households, so that donors with the greatest capacity to give have more reasons to do so."

Since then, the Obama administration has also put out a follow-up from the Office of Management and Budget. Their response to the criticism from me and others (including The Independent Sector, The Partnership for Philanthropy and The Council on Foundations) was threefold. I present their arguments below and my reaction to them:

1. OMB argument: The proposed tax changes would not be imposed during a recession ... Instead it would begin in 2011 - at which point we expect the economy to be recovering.

Reaction: There is no guarantee that the economy will be better and to what degree it will be "recovering". This is all hypothetical. The one thing that is certain is that the Obama administration intends to impose a reduction in the deduction regardless.

2. OMB argument: The money raised from the limits on itemized deductions would be used as part of the historic $634 billion reserve fund to fund health care reform.

Reaction: This tax change is taking from donations to all categories of charities to give to an array of health care charities and others. It is penalizing the generosity of the affluent. Many charities, both large and small, garner 80% or more of their private contributions from a handful of affluent donors. If these donors reduce their donations, it could have horrific consequences for these charities.

Furthermore, government funding is often the worst type of funding a charity can receive. I know from years of running government funded programs that many of these contracts pay no more than 10% for overhead costs. Charity Navigator considers the best charities to have an overhead rate of 25% (15% for administration and 10% for fundraising) or less. Most 4 star charities are in the 20 to 25% range. So when a charity gets a government contract, it typically is "shooting itself in the foot", financially speaking. The charity will usually have to raise the additional 10 to 15% of its overhead costs from the public. A public where the affluent (80% of the donation pool for many charities) will now be less inclined to give as much. In addition, most government contracts have onerous, time-consuming reporting requirements which further increase overhead costs beyond the normal.

3. OMB argument: There is a question of fairness...If you're a teacher making $50,000 a year and decide to donate $1,000...; you enjoy a tax break of $150. If you are Warren Buffet... you get a $350 deduction...

Reaction: Fairness! The OMB neglects to mention that the overall tax rate for the more affluent households is going to increase from 35% to 39.6% and they are also proposing to eliminate other deductions for this group of tax payers (mortgage interest, as well as state and local taxes). At the same time, that $50,000 teacher (assuming two children) will on average have their overall tax rate go to zero! So let's be fair in our comparisons!

On top of all of the increased taxation mentioned above, most of us have seen a decline in our investments of 50% or so. We are in uncharted waters here. Whereas historically, half of affluent givers may have said that tax deductions do not impact their giving decisions, that does not mean it will continue to be so. As one of our users commented on the Charity Navigator blog,

"Although I don't give to charity for the tax benefits, I may have to give less because I can't afford to give as much if my obligation to the government is increased. It's that simple. I do [emphasis added] think this proposed change could have a direct, negative effect on charities, and I hope it gets re-evaluated."

Of course we agree with those who say that often the primary and very best reason for giving is out of benevolence, but incentives and self interest have also been important factors. That is the basis of our capitalist system isn't it? The charities I spoke with in Russia and China are desperate for, and envious of, our tax policies. The reason our rate of donation is the envy of the rest of the world (more than double anywhere else) in part rests on the heart and soul of the American people, but it also rests on pragmatic government policies that lead to enlightened self interest. I hope the Obama administration will wake up and smell the coffee. As I originally stated on CNN, the proposed reduction in the Charitable Tax Deduction is a horrible idea.

17 comments:

Our economy is totally out of balance and all of us need to take responsibility for the current mess. Each person/entity is trying to their best to say they shouldn't be affected. Too bad. All of us need to take to be part of the solution.

Obama is trying to restore balance. The other day on NPR it was reported that in 2008 the wealthiest 1% of folks took home 22% of the national income.

I am not rendering an opinion about the OVERALL tax rate for the affluent, I am talking about charitable tax deductions. I spent many years dedicated to serving the poorest of the poor and I know how important gifts from a handful of wealthy donors can be to the organizations that serve them.

I have greater faith in the philanthropic nature of the HNW and UHNW than to believe that the changes in deductibility will create a tsunami-like rollback in major and mega gifts.

On the upside, we know that households at lower income levels give a larger percentage of their discretionary income to charity than do the wealthy. So we should see an uptick in lower-end giving once all the reforms are in place!

I'll refrain from starting a debate over whether the potential diversion of charitable funding from, say, the arts, for example, to improved health care, via tax-funded government initiatives, is a wise or moral choice.

Assuming that the great drop in funding does occur, I'd like to turn the discussion to the topic of how we "replace" the feared tax-challenged reduction in gifts.

I, for one, would like to re-visit the proposal to change the distribution requirements on private foundations. I know that the foundation powers will balk at an increase in the overall percentage requirement.

Therefore, how about re-opening the discussion about eliminating administrative and operating costs from the 5% distribution calculation?

Perhaps the drop in large gifts would be offset by increased foundation funding -- AND we'd also benefit from the bonus "bounce" in giving from lower-income households.

Ken, thanks for your comments on my posting; I am flattered that you choose to read my blog. I do understand your response to my comments, and I do think one can conceptualize a better overall charitable giving provision, But we are allowed to disagree: Without revisiting both of our arguments, it is my feeling that this is the wrong battle at this time. There are huge public policy issues before us and I am uncomfortable with the wealthiest [albeit that there are fewer] making a stand on this issue which comes across as self serving. We agree that history may not give us direction in these times, but we don't agree that this is where the issue should be joined.

Thanks for your feedback. My sense is that on many issues you and I may agree. However, in this case we will agree to disagree.

Any steps that are taken by government, which will (or even may) reduce contributions to charity in this financial environment, are critically important to speak out on. I think many (I am not talking about you) are reticent to do so because they are politically supportive of the Obama administration. They also hope to garner more direct government support. That is wrong headed in my view and may be a harbinger of a dangerous approach that mutes criticism when it is warranted. This is one of those times where I think such criticism is quite warranted and important!

I believe you can do something to help us, help you. You may have and advantage over the individual tax payer. Congress stopped listening to us a long time ago. Gather your resources and your loudest drums. Redirect Washington: they are not the charity you are.

The government can turn a dollar into a dime; if i give you a dollar, it's still a dollar.

Currently, "JOE" has nothing left to give after "SAM" takes his share.

I give about 10% of the income I take in, meaning I donate around $3000 or so to charities each year (I'm married and my wife's income and her giving is separate). Though my primary motivation is helping others, the tax deduction is always lurking. How can it not be for anyone? Obama's healthcare plan is suspect; that's why he's looking for shadowy funding.

The research on the charitable tax deduction for those who make $200,000 plus indicates (based on self report) that a little over 50% claim their giving decision is not based on whether or not there is ANY deduction. However, that is OLD news. In the current economy I believe that the % who feel this way will decline.

As to Obama's broader tax plans and goals, I believe the more that government encourages private contributions to independent charities the better. Other strategies are far less efficient and effective in the long run. However, according to the latest research I have seen, about 14% of funding comes from private contributions and 40% from government!

This idea of Obama's is another example of the federal government wanting to take over all aspects of our lives. They believe we do not have the ability to think for ourselves and choose where we want our charitable dollars to go. They think they can choose better for us. I believe many non-profit organizations will suffer due to this measure. I for one give to the causes I believe in, while appreciating the tax deduction, and will continue to do so as long as I am able - if the government does not tax away all of my extra income.

Ken, As Treasurer for a mid-level non-profit relief and development organization, I am very concerned about this issue. We have many donors who are quite altruistic, but many more who are honestly giving for the write-off - both corporate and individual. We've already seen a significant dropoff since last Fall, and I believe that its going to take a good deal of time for donors to gain back enough confidence in the economy to raise giving levels again. As grantees for several Federal programs, I'm all too aware of the pros and cons that come with governement funding. This entire issue is something that anyone involved in non-profits should be very aware of. Thank you for providing such succinct, informed, balanced information.J. Moore

There is nothing against wealthy people giving to charity. However, why should the government assign subsidies according to the preferences of the super-rich and not according to the preferences of the Congress? Because this is what happens with tax exemptions: part of the gift is paid by those who still pay taxes (not the rich), and for the causes the rich support.

The fact that those who are wealthier get a higher tax deduction than the rest of us is not what I am arguing about. I think the deduction is inadequate for all and needs to be more targeted to areas of greatest societal need. However, the President (not the Congress) is advocating for a reduction and a cap on tax deductions. Who gives the lion's share of money to charity? The wealthy. Therefore it could be devastating to those in greatest need if the deduction is reduced. It is that simple.

Btw, This is not a "subsidy" in my view. Our country is unique in its reliance on nonprofits to do the job that is typically done by government in most countries. Therefore, it is critically important that the government incentivize such giving. That is a critically different framework.